This article was contributed by the Commonwealth Grants Commission (September 2004).

The Commonwealth Grants Commission is an Australian Government statutory authority operating under the Commonwealth Grants Commission Act 1973. Its main function is to report annually to the Australian Government on the share each state and territory government should receive of the pool of Goods and Services Tax (GST) revenue and Health Care Grants (HCGs). The funds distributed by the Commission amounted to $38,825m in 2003-04 and were equivalent to 34% of the gross operating expenses of the states and territories in total. This ranged from 64% for the Northern Territory to 29% for Western Australia.

In deciding its recommended distribution of GST and HCGs, the Commission uses a specific principle of fiscal equalisation, which says:

State (and territory) governments should receive funding from the pool of goods and services tax revenue and health care grants such that, if each made the same effort to raise revenue from its own sources and operated at the same level of efficiency, each would have the capacity to provide services at the same standard.

This principle reflects similar values to those reflected in Australia’s social security and taxation systems. For example, the social security system provides:

more assistance to those who are more needy; and

less assistance to those who have the capacity to address their own needs.

The tax system raises more tax from those with higher incomes or more valuable properties.

Just like those systems, the fiscal equalisation system delivers more money to states and territories which are more needy (face higher costs through no fault of their own) or which are less able to raise their own revenue.

Therefore, the Commission evaluates how much revenue states and territories could raise and how much their services would cost if they operated at Australian average levels. Based on its findings, it recommends an allocation of GST revenue and HCGs for each state and territory. This allocation is intended to give all states and territories the capacity to provide the same level of services while maintaining their flexibility to vary the service levels and revenue effort to best meet the needs of their citizens.

To evaluate states and territories’ revenue raising capacities and their costs of providing services, the Commission makes extensive use of Australian Bureau of Statistics (ABS) data. For example:

Government Finance Statistics (GFS). The Commission calculates national average per person expenses using GFS data at a dissaggregated level to provide a base for its comparisons. For example, it makes comparisons of the costs states and territories incur in transporting school students in non-urban areas and comparisons of the costs they incur in transporting school students in other areas.

Population data. ABS population data are used extensively by the Commission for working out differences in state and territories' costs of providing average services to their populations. Some population groups use services more or less than others, and a unit of service for some groups may cost more to provide. As a result, costs will differ. It is therefore important to identify those jurisdictions which have more or less people in those groups. The Commission uses population data dissected by such characteristics as age, sex, Indigenous status, level of income, level of English fluency and region. The Commission also uses mean resident population data provided by ABS to derive per capita figures for each of the states and territories and for Australia as a whole. (footnote 1)

Data on state services. The Commission also uses ABS data on state and territory services to estimate cost differences. For example, the Commission uses ABS data on student numbers because it needs to know which jurisdictions have more students in their populations than others. It uses enrolment data for each year dissected by sector, age and grade. Different numbers of students per person, distributed differently by sector (government and non-government) and grade result in differences in per person costs. Similarly, the Commission uses ABS National Health Survey data to calculate the impact of income on a person’s use of health services. The differential demands and unit costs of providing corrective services for individual states and territories are measured using prisoner numbers and their socio-demographic profile (age, sex, Indigenous status).

Taxation data. To take account of influences beyond the control of a state or territory that would result in it raising more (or less) revenue per person than other states and territories, the Commission sometimes uses ABS data. Tax bases jurisdictions can access are generally measured using data on the number or value of activities, and transactions or assets subject to a tax. For example, the tax base for payroll tax is the estimated annual value of payrolls above a threshold level paid by private sector businesses and most public trading enterprises. These data are also obtained from the ABS.

Economic data. States and territories face different cost structures and the Commission needs to recognise these. The Commission uses data from the periodic ABS Surveys of Education and Training to identify the underlying differences in the wages paid. It also sometimes uses economic indicators to reflect the capacity of states and territories to raise revenue in a broad way. Gross household disposable income is used to measure capacity to raise gambling taxes.

Finally, the Commission uses ABS data to conduct ‘reality checks’ of its overall calculations and to explain its results. It uses economic indicators such as gross state product, turnover of retail establishments, value of commercial/industrial land and unemployment rates for this purpose.

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